There are so many words of advice about purchasing a car that I wanted to throw my hat in the ring as well. The reason I want to do this is because I have a little different view point about purchasing a car. I don’t disagree with the other view points as I think they are valid, but I just have a little twist in how I see it. As stated time and time again, finance decisions like this are personal and you have to make the best financial decision based on you.
When buying a vehicle, it’s entirely personal whether you pay cash or finance your next vehicle. I go back and forth depending on the current economic environment, car prices, and what kind of rates I can get. It’s not a cut and dry scenario, but if you are in debt, try to save and pay cash. If you are working on building wealth, if you can get a rate lower than what you can make on your money, then finance.
Pay Cash or Finance Your Car?
There are only two ways to buy a car, whether it is new or used. You can pay cash for it or you can finance it. There are many ways to finance a car, whether it be dealer financing, bank financing, or personal loans. No matter what way you split it, you still have to pay for the car. I don’t want to discuss different ways to finance your car, but I do want to discuss when you should think about paying cash or finance your next car. Let’s break it down, shall we?
Buying Your Car with Cash
Typically, you should always think about paying cash for your car. You can either pay the full amount with cash, or you can do a split between cash and financing. The more cash you put down, the less you have to finance. The less you finance, the less you will pay in interest and the less debt you will have It is just simple math. Cash will get you a car with no strings attached and you will not have to make monthly payments.
The current average car payment for new cars in 2023 is $716 per month. The average for used cars is $526 according to Bankrate. This is huge part of most American household budgets, but if you put more down toward your car, you can reduce this monthly cost.
Many people used to pay cash for used cars because they are cheaper. That was the case until the Pandemic of 2020. This inflated the cost of used cars because new car supplies shrunk quickly. Paying cash for a new car would be very difficult for most people. I don’t know that many people that have $50,000 in cash just sitting around.
The average cost of a new car in 2023 is hovering around $48,000 according to Car and Driver. That’s not attainable for most people with cash.
Having said this, I do think there are times when cash might not be king. You might wonder where I plan on going with this and why a personal finance blogger might be advocating not using cash. Let me explain below.
When to Finance Your Car
If you are in debt, then I DON’T recommend financing a car. You are just adding more debt and you need to get your other debt paid off. You can find yourself very underwater if you keep adding debt on top of debt. Now, if you don’t have any debt (minus your mortgage), then there are times when financing might actually be a good idea.
Let’s say you have the cash to pay for a car, but you then get offered 0% to finance the car through the dealer. If it was me, I would go with the financing. Why, you ask? The dealer is giving me free money to finance through them. I can get into a brand new car and not pay a dime in interest for it. Yes, I have to pay a monthly payment each month, but now I have my cash to do whatever I want with.
I would take the cash for the car and then invest it. The average return on the stock market is around 10%. Would you rather pay cash for a car or be able to finance it with no interest and then have your money make money? I choose to make money if I can.
There is another reason why I would choose to finance and that is when you need to keep your cash liquid. Not everyone can drop a lot of their cash on a car because it would leave them with nothing. No back up funds, no emergency funds, nothing. That is not a safe place to be in.
I have been offered used car loans from my credit union at only 1.49% APR. I would even take that financing offer over paying cash for the car. This is a very personal decision for me, but I would rather have the cash liquid or making money with investments. Do you think it is risky to invest the cash instead of paying for the car? I think it is, but you can’t gain anything if you don’t risk anything. Just remember that.
What Should You Do?
This is the question you probably want me to answer for you. Unfortunately, I can’t really do that because I don’t know your situation and how you are with money. What I can tell you is that you should think about the possibility of paying cash or financing. It comes down to your personal situation.
This changes as financing costs go up as they have in 2022 and 2023. Rates pushing auto loans upwards of 6-7% make it harder to make a return when investing the money. So that could change your math greatly.
Make sure you look over what you can do. Don’t just finance the car because you can. Do the math between paying cash and financing and then make your decision. I wanted to write this to show that it is not always cut and dry when purchasing a car. If you don’t ever want to add debt, then don’t finance a car and pay for it with cash. If you don’t want to put all of your available cash toward a car purchase and can get a great, low rate, then finance your car. There are options out there for everyone.